Sunday, November 30, 2008 (SF Chronicle)
You can qualify for mortgage, it's just tougher
Marni Leff Kottle, Special to The Chronicle


   There is something that mortgage lenders want Bay Area home buyers to
know: They are open for business.
   While it is certainly harder to get a loan today than it was two years
ago, lenders say it's far from impossible for would-be borrowers with the
right credentials. In fact many in the industry praise the return to
normal, where loan candidates are required to prove they can pay back the
money they borrow.
   "You can't turn on the TV or pick up the newspaper without reading about
the credit crisis," said Arlene Allert, a regional manager and vice
president at Wells Fargo Home Mortgage. "It leads to the perception that
consumers can't get the credit they need to buy a home."
   Across the board, mortgage industry executives, real estate agents and
others say that news stories about Wall Street's woes have left people
convinced that it's simply not possible to get a loan.
   "Prospective home buyers come in and they say, 'This is probably
impossible, but I would like to buy a home,' " said John Holmgren, a
spokesman for the California Association of Mortgage Brokers, an industry
trade group.
   "They say, 'If General Motors can't get a loan then it must be impossible
for somebody like Little Mr. Me to borrow money, right?' But it is
possible."
   Lenders and others in the mortgage industry were very clear that the bar
has risen. Today borrowers need three things to qualify for a loan:
documentable income, good credit - a score of at least 620 - and a down
payment in most cases of at least 10 percent, according to the California
Association of Mortgage Brokers.
   "Mortgages haven't gone away. Mortgage lending hasn't gone away," Allert
said. "We've just gone back in time." Down payment
   Gone are the days of buying a home with zero down, mortgage experts said.
But exactly how much cash a home buyer needs to come up with will depend
on the situation.
   The best rates and widest variety of loans are available to borrowers who
have at least 20 percent to put down, said Matt Vernon, a national sales
executive with Bank of America. "The size of the down payment ranges by
product, but the 20 percent number is a safe one to guarantee a good
rate," Vernon said.
   "Certainly some products are a little less, some may have higher
requirements than that." Buyers with less than 20 percent to put down will
wind up paying more for their loans because they will almost certainly
need to take out mortgage insurance.
   "Any time you're under 20 percent, you're going to need mortgage
insurance," Vernon said.
   Borrowers can pay for the mortgage insurance in a number of ways, but no
matter how it is done, it will raise the cost of borrowing money, said
Holmgren, the spokesman for the mortgage trade group.
   Home buyers often rely on lender-paid insurance, which builds the cost of
insurance into the loan by raising the interest rate. Consumers can also
opt for private mortgage insurance programs, where the borrower makes
monthly payments separately from the loan just as they would for any other
type of insurance.
   Still, some real estate experts pointed out, even though home prices have
fallen sharply in the Bay Area, many potential buyers are going to
struggle to come up with such a significant down payment.
   The median price for a home or condo in San Francisco dropped 12.1 percent
last month to $699,000, according to MDS DataQuick, the real estate
information service. A down payment of 20 percent for a median priced home
would be $139,800 and it would take $69,900 to meet the lower bar of 10
percent based on the October figures.
   That's a lot for most people, said Ken Rosen, chairman of the Fisher
Center for Real Estate and Urban Economics at UC Berkeley.
   "It's a very big number - 20 percent is a very stiff standard," Rosen
said. "You are talking about $100,000 to $150,000 in cash and people just
don't have it." When home prices were rising, it was easy to get loans,
Rosen said. Now that the market has collapsed, it's much more difficult, a
relationship that doesn't make economic sense.
   "At the peak the credit market should be at its tightest, and at the
bottom it should loosen up," he said. "The credit market should be
counter-cyclical to the housing market." Good credit
   Leery of borrowers who have poor track records, lenders are now reviewing
credit reports much more carefully in an attempt to insure that loans are
paid back.
   "All of us have a written story of our willingness to repay," said Allert.
"We look at housing debt, whether it has been paid in the past and paid on
time, whether the consumer has fulfilled that obligation on a mortgage or
rental history. Has the credit card debt been paid in a timely manner?"
   The actual credit score is just one element of a credit report, Allert
said. Lenders also examine information such as utility bills in an effort
to put together a complete credit history.
   Allert and other bank officials were reluctant to site a minimum threshold
for a credit score, saying that the standards are changing almost daily
and that it depends on each individual's circumstances and the type of
loan sought.
   Mortgage brokers, however, said typically a borrower needs at least a 620
credit score. "That's one of the hardest parts for people these days,"
said Ed Craine, chief executive of Smith-Craine Finance, a San Francisco
mortgage lender.
   The less a borrower has to put down, the higher the credit score
requirements are going to be, said Holmgren of the mortgage trade group.
He said that's one area where lending standards have changed dramatically
as a direct result of the subprime debacle.
   "A few years ago, you could have a very, very low credit score and still
get a loan for more than 80 percent of the home's value," he said.
   Today, borrowers who put down less than 20 percent may need a credit score
of as much as 720, he said.
   Although Bay Area home prices have fallen, leaving fewer buyers to seek
jumbo loans, people seeking to borrow such large amounts of money also
need higher credit scores. A new government program has raised the limits
on so-called jumbo conforming loans and as of Jan. 1 that limit will be
$625,500.
   "Anything that falls into that category or lower will be relatively easier
to finance," said Craine.
   Conventional conforming loans are $417,000 or less. Federal Housing
Administration loans are still available in some cases to people with
lower credit scores, and often have lower down payment requirements,
Craine said. The FHA is a government program that insures mortgages and
was created to help people who wouldn't otherwise be able to purchase a
home. Proof of income
   The final criterion that is critical for would-be borrowers is documented
income high enough to support the monthly payments on the property,
lenders said.
   "You have to have a realistic expectation of a home that you can afford
and that you have the ability to repay," said Bank of America's Vernon.
"The industry term is debt-to-income-ratio. What that means is, 'Are you
looking at a home that makes sense for you? Do you have the greatest
degree of confidence that you will be able to pay back the loan?' "
   Lenders are now going over loan applications with a fine-tooth comb,
particularly income requirements, Holmgren said.
   While much more stringent than what borrowers had come to expect in recent
years, current loan standards aren't vastly different from those that
existed in the 1980s and 1990s.
   "You're going to an institution and asking them for hundreds of thousands
of dollars to facilitate a home purchase," he said. "It's right to require
some documentation."
   And while Rosen, the Berkeley economist, said he expects lenders may
eventually loosen up again on the minimum down payment, he said that
income documentation requirements are here to stay.
   "Full documentation is something we will see for sure, no matter what,"
Rosen said.
   For those home shoppers who do have good credit, money in the bank and
income high enough to support the value of the house they are trying to
purchase, there may not be a better time to buy a home, said Allert, the
Wells Fargo executive.
   "Real estate is on sale right now compared to where it has been for a long
time, particularly in the Bay Area," she said.

Marni Leff Kottle is a San Francisco freelance writer. Comment at
realestate@sfchronicle.com. ----------------------------------------------------------------------
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